The South London Healthcare Trust, which runs three hospitals in south-east London, has recently been put into administration by the UK Secretary of State for Health as it struggles with its debts and deficits (see, for example, PFI will ultimately cost £300bn, Guardian, 5th July 2012). This story has much wider significance than a struggle with the effect of cuts in health expenditure, as much of the blame for the financial plight of this healthcare trust is being put at the door of the costs of the use of the private finance initiative (PFI) for the construction of two of the hospitals managed by the trust. It is also seen as a forerunner for further financial difficulties for many other healthcare trusts arising from the PFI-financed hospitals. It is indicative of the dangers of public partnerships which are costly, inflexible and disguise the financial implications of infrastructure investment.

The UK PFI is a scheme whereby an infrastructure investment (such as school, hospital, road) is financed and built by a private company. Then the government leases the infrastructure along with the provision of the servicing, repair etc of the infrastructure investment. The leasing agreement has generally been for 25 to 30 years.

The UK PFI schemes are one example of public-private partnerships (PPPs) which have grown rapidly in the past two decades. Similar schemes have been operated around the world, often with the encouragement of the IMF, the World Bank, the European Investment Bank and other international institutions. In the UK, PFI schemes had started in the early 1990s under the Conservative administration. Although it proved controversial and was attacked by the Labour Party while in opposition, PFI was much expanded under the Labour government, which came to power in 1997.

Both Conservative and Labour governments justified PFI on the premise that the private sector is better at delivering services than the public sector, and fitted with the promotion of a neo-liberal agenda. PFI became something of a flag-ship policy promoted as a way of increasing investment in infrastructure without impinging on the public debt as the financing of the investment was off the government’s balance sheet. This was despite the fact that the government was committed to meeting the leasing and service charges for up to 30 years. The PFI schemes became the major form of privatisation under ‘new Labour’, post-1997 in the UK, with many infrastructure projects, which would have otherwise been commissioned by the government, and then operated by the government and subsequently being under private ownership and operated by the private sector.

The Guardian report indicates that repayments under PFIs in the UK “will continue ballooning until they peak at £10.1bn a year by 2017-18. The 717 PFI contracts currently underway across the UK are funding new schools, hospitals and other public facilities with a total capital value of £54.7bn, but the overall ultimate cost will reach £301bn by the time they have been paid off over the coming decades”. The PFI schemes were a way of undertaking infrastructure investment which was ‘off-balance-sheet’ and did not immediately get included in debt or deficit calculations. But the schemes come back to haunt as the much higher costs under PFI leasing arrangements have to be paid.

One of the driving forces behind PFI was the desire to get infrastructure investment financing charges off balance sheet. There was a strong element of sleight of hand involved. Whilst the public debt could be quoted as being lower when the PFI approach was adopted (as compared with conventional public investment covered by government borrowing), this was at the expense of higher budget deficits. If financial markets and credit rating agencies are supposedly concerned over the scale of public debt (relative to GDP) then the argument would go that they would be favourably disposed to PFI as it kept down public debt. But that only holds if the financial markets can be hood winked into not realising the future commitments of leasing charges, even though if similar leasing arrangements were made by a private company, then the associated liabilities would be included in the company’s balance sheet.

There were many objections to the PFI-type schemes, and two central ones should be highlighted. First, the cost of finance for PFI investments would inevitably be higher than the cost of finance for public investments directly financed by government. The government can borrow at a lower rate of interest than a private sector company. This becomes relevant for the situation indicated at the opening of this blog. The South London Health trust is paying for the financing costs and the service charges of the PFI company through the leasing charges. Now, if the hospital had been constructed on ‘conventional’ public investment lines, there would have been an interest charge to be associated with the hospital, but it would have been lower.

Second, there are the inevitable inflexibilities of the use and design of the PFI project. Tales abound of the costs associated with making small changes to the design (after construction) of the project – case of plugs. The required size and location of schools depend on demographic factors. The ways in which hospitals are laid out will necessarily change as technology changes. Making those changes is costly.

The PFI schemes land the public sector with over-priced and inflexible schemes, and the prospects of mounting costs (see, Shaoul, 2008, and Sawyer, 2008, for further details).

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